Changes in Analysts’ Recommendations Won’t Help You

• AAII Stock Screen Performance History – Year-by-year performance data for our earnings estimate revisions screens, along with performance data for all of the other AAII stocks screens, updated monthly and grouped by category.
  
• Earnings Estimates – I explained in further detail what earnings estimates are and how they can lead to both higher (positive revisions) and lower (negative revisions) stock prices.
  
• A Look at Relative Strength Measures – Should a stock move upward in response to a change in an analysts’ outlook, the move will likely be reflected in its relative strength. AAII president John Bajkowski discusses relative strength in his latest AAII Blog post.
  
• Do You Pay Attention to Analyst Recommendations? – Tell us on the AAII.com Discussion Boards.
  

For just the third time in the past 23 weeks, at least one in three individual investors say they are optimistic about the short-term direction of stock prices, according to the latest AAII Sentiment Survey. Meanwhile, neutral sentiment is above 40% for a sixth consecutive week.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 5.6 percentage points to 33.4%. This is a five-week high. Even with the rebound, optimism is below its historical average of 39.0% for the 24th consecutive week and the 57th out of the past 59 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.6 percentage points to 42.7%. As noted above, this is the sixth consecutive week that neutral sentiment is above 40%—the longest such streak since a 16-week stretch between April 9 and July 15, 2015. This is the also the 12th consecutive week and the 64th out of the past 68 weeks with a neutral sentiment reading above its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.0 percentage points to 23.9%. The decrease keeps pessimism below its historical average of 30.0% for an eighth consecutive week.

Even though the S&P 500 index is trading near its record high and the smaller-cap Russell 2000 index has rebounded as well, many individual investors remain cautious. Optimism has mostly stayed below its historical average over the past 60 weeks. Even this week’s reading was only the third time that bullish sentiment has exceeded 33% since last November. Notably, when the S&P 500 set its last record closing high on May 21, 2015, just 25.2% of surveyed individual investors described their outlook as bullish.

Currently giving individual investors cause for concern is the slow pace of U.S. economic growth and uncertain global economic growth, terrorism and global unrest, lackluster corporate earnings and the prevailing level of valuations. Some AAII members, however, are encouraged by sustained domestic economic growth, expected corporate earnings growth and still-low energy prices.

This week’s special question asked AAII members what their comfort level is with the current valuations of stocks. Slightly more than one out of four respondents (26%) view stock prices as being overvalued. An additional 22% said that they are either uncomfortable with current valuations or that stocks are somewhat overvalued. The lack of adequate earnings to support current prices was the most common reason given as to why, followed by a lack of sufficient earnings growth. Conversely, nearly 14% of respondents said they are comfortable with the current level of valuations. About 8% of respondents said that stocks are fairly valued right now.

Here is a sampling of the responses:

• “Many companies that I follow appear overvalued based on most of the traditional valuation metrics.”
• “A little uncomfortable. Earnings need to catch up.”
• “In general, overvalued with low growth expected to continue.”
• “I expect future profit improvement, which will result in stocks being cheap.”
• “Stocks are probably fairly valued at this point…no overwhelming buys or sells.”